ESG Performance and Earnings Management: Evidence from Chinese Listed Firms

Abstract

This study examines whether prior environmental, social, and governance (ESG) performance is associated with subsequent accrual-based and real earnings management among Chinese A-share listed non-financial firms over 2015–2024. The temporally ordered design measures ESG performance at t?1, earnings management at t, and background covariates at t?2, yielding earnings-management outcomes from 2017 onward. Accrual-based earnings management (AEM) is measured by the absolute value of Modified Jones discretionary accruals, while real earnings management (REM) is captured by a signed composite of abnormal production costs, operating cash flows, and discretionary expenses. ESG performance is measured using a composite constructed from eight rating providers. Pooled ordinary least squares (OLS) models include Hybrid Industry and Year fixed effects with firm-clustered standard errors. The results show that stronger prior ESG performance is associated with a lower subsequent magnitude of AEM and lower subsequent upward-directed REM. The COVID-19 phase analysis shows that neither the During–Pre nor the Post–Pre contrast is statistically significant for the ESG–AEM association, whereas the negative ESG–REM association is significantly more pronounced in the Post period than in the Pre period. The principal full-sample associations remain consistent across the robustness specifications. All findings are interpreted as conditional associations rather than causal effects.